As I said earlier, I think S&P was wrong to downgrade U.S. debt. It was a panicky reaction to a bit of ugly, but ultimately mundane political squabbling that hasn't really lasted very long in historical terms. If we're still threatening serial defaults in 2015, then fine. Pull the trigger. But nothing much has changed about our long-term entitlement problems lately, our demographic trends remain more favorable than in most countries, and progress on tough issues like Medicare and Social Security legitimately takes years, not months.

That said, it's true that our recent behavior has been unusually ugly, and S&P's case for downgrade isn't wholly without merit. What's more, whether I think they were right or not, they certainly telegraphed their intentions well ahead of time. This is from their statement tonight:

The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.

Translation: Argue over the budget all you want, but Republican games over the debt ceiling simply aren't compatible with being a AAA superpower. Then, after some pro forma jabs at everyone for being unwilling to cut a better deal, they really lay into the GOP:

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.

Translation: America's future fiscal stability will require higher taxes, and in the past we assumed that, political bluster aside, everyone knew that. But apparently not, and Republican intransigence on this point is endangering the country. Daniel Gross says this more pointedly:

It has long been obvious to all observers — to economists, to politicians, to anti-deficit groups, to the ratings agencies — that closing fiscal gaps will require tax increases, or the closure of big tax loopholes, or significant tax reform that will raise significantly larger sums of tax revenue than the system does now. Today, taxes as a percentage of GDP are at historic lows. Marginal rates on income and investments are at historic lows. Corporate tax receipts as a percentage of GDP are at historic lows. Perhaps taxes don't need to rise this year or next, but they do need to go up in the future.

....This calamity was entirely man-made — even intentional. The contemporary Republican Party is fixated on taxes. It possesses an iron-clad belief that the existing tax rates should never go up, that loopholes shouldn't be closed unless they're offset by other tax reductions, that the fact that hedge fund managers pay lower tax rates than school teachers makes complete sense, that a reversion to the tax rates of the prosperous 1990's or 1980's would be unacceptable.

Again: regardless of whether S&P is right or wrong, everyone knew this was coming. All along, deals have been on the table that would have ended the threat of downgrade — deals that a Democratic president proposed even though they included program cuts that were agonizing to most of his fellow Democrats. But Republicans simply refused to consider them. In the end, they preferred to gamble with the financial decline of the country rather than face the obvious reality that eventually revenues are going to have to increase as America ages. It's like watching someone mindlessly playing Russian roulette with five chambers loaded. One round has just gone off, and if nothing changes it won't be the last.

Why S&P Is Wrong

In what sounded at first like something from the Onion, Standard & Poor's postponed its planned downgrade of US debt for a few hours today after the White House pointed out that it had made a $2 trillion arithmetic error in its calculation of future deficits. Seriously. These guys are supposed to have the most sophisticated stable of financial analysts on the planet, but apparently they can't come within $2 trillion of figuring out something that's a simple matter of looking through OMB tables and CBO reports.

But set that aside for the moment. What's $2 trillion between friends? We all agree on the rough size of America's fiscal woes and $2 trillion one way or the other isn't all that decisive. So the question of the day is: Should S&P have downgraded our debt? Felix Salmon says emphatically yes:

The US does not deserve a triple-A rating, and the reason has nothing whatsoever to do with its debt ratios. America's ability to pay is neither here nor there: the problem is its willingness to pay. And there’s a serious constituency of powerful people in Congress who are perfectly willing and even eager to drive the US into default. The Tea Party is fully cognizant that it has been given a bazooka, and it's just itching to pull the trigger. There's no good reason to believe that won’t happen at some point.

I hate to let anyone one-up me in my contempt for the absurd stranglehold the tea party holds over John Boehner and a cowering GOP, but this really, really just isn't true. Yes, there were a few tea partyish lunatics in Congress who apparently intended to vote against a debt ceiling increase no matter what. About 20 or 30, I think. And yes, the tea party contingent brought us to the brink of a partial government shutdown, which would have been bad news for the economy.

But in the end—and no one who has even a nodding acquaintance with political history should be surprised that it took until the 11th hour—a deal was cut. What's more, even if a deal hadn't been cut by August 2nd, we wouldn't have defaulted on our debt. A bunch of government services would have been temporarily put on hold, but bondholders would have been completely unaffected. This is a really important point. It's true that a temporary government shutdown would have been bad, but this has happened before. It's ugly and stupid and unnecessary, but it's politics. America's debt, however, was never at any risk.

On a similar note, here's Ezra Klein:

S&P is downgrading their estimation of our political system, not our actual ability to pay our debts.…Of course S&P is downgrading our political system. Did you see the nonsense we pulled over the past few months?.…Why shouldn’t S&P downgrade our debt?

Answer: because S&P shouldn't be in the business of commenting on a country's political spats unless they've been going on so long that they're likely to have a real, concrete impact on the safety of a country's bonds. And that hasn't happened yet. There's no serious macroeconomic reason to think America can't service its debt and there's no serious political reason to think the tea party has anything close to the power to provoke a political meltdown in which we won't pay our debt.

Look. The United States has been running up big debts for the past couple of years because we're trying to climb out of an epic recession: Jobs and economic recovery are exactly where our fiscal spotlight should have been. As a result, we've been focusing on our long-term debt for, literally, less than a year. Pretending that our political system is fundamentally broken because we haven't solved our long-term entitlement problems in a few months is staggeringly panicky and ahistorical, and S&P's weird obsession with hitting a $4 trillion target for medium-term deficit reduction is economically vacuous. If we still can't get our act together in four or five years, then fine. We deserve a downgrade. But a few months? That's crazy. It's the kind of hair-trigger reaction that belongs on cable shoutfests, not in the boardroom of a sober, 150-year-old financial firm.

Ezra predicted that in its downgrade S&P might call out Republicans for refusing to accept any deal that increases taxes. In their statement tonight they did in fact do this, albeit pretty gingerly. I think that's great, and I welcome it. But it still doesn't mean that S&P is right to use its rating authority as an excuse for political tsk-tsking. It should care only about the safety of US bonds, and for the moment anyway, there's no legitimate reason to think either that we can't pay or that we won't pay. The bond market, which has all the same information as S&P, continues to believe that US debt is the safest in the world, and in this case the market is right. S&P should stop playing dumb political games and stick to its core business.

Front page photo by TreyDanger/Flickr

Well, this has been kind of a dismal week. So would you like some cats to cheer you up? Of course you would! On the left, Domino suddenly perks up and gives me a good stare. On the right, a few minutes later, it's Inkblot's turn. Can you guess why they're staring at me? Huh? Can you? I'll give you a hint: These pictures were taken at about 4:55 pm a few days ago.

Andrew Sullivan weighs into the debate about whether Obama has been a successful president and concludes unsurprisingly1 that he has been: "Obama is easily the winner and currently stupidly under-rated," he says. But at the end of his post he tosses out this aside:

But notice what hasn't happened. Where are all the scandals promised by Michelle Malkin? Where are his Katrinas and Monicas?

This struck me because I happened to be thinking the same thing a couple of days ago.   Democrats in Congress have had a few wee bouts of bad behavior lately, but nothing out of the ordinary. All in all, despite the noise machine's woeful attempts to talk up his alleged Chicago thuggishness, Obama's presidency has so far been almost completely free of scandal. No sex scandals, no money scandals, no conflict-of-interest scandals, no nothing. This is why his less judicious enemies are still pathetically beating the Bill Ayers drum: because they haven't been able to come up with anything better.

The usual time for a party/presidency to become scandal-ridden is year 6, which for Obama will be 2014 if he gets reelected. So far, though, he's run such a clean shop that I wonder if he'll avoid the six-year itch completely?

1Unsurprisingly for anyone who reads Sullivan's blog, anyway.

The economy added 117,000 jobs in July. Unfortunately, we need to add about 150,000 jobs each month merely to keep up with population growth. So the real net job growth picture is actually negative. The chart below shows real net job growth since 2009, and it's obviously not a pretty picture. It would be nice if Republicans in Congress would allow us to do something about this.

Here's the latest on George Bush's Medicare prescription drug program:

Even as health costs continue to rise, Medicare beneficiaries will see the average price of a Part D drug plan decline slightly next year, the Obama administration announced Thursday....Popular with beneficiaries, the program has also proven far less costly than budget analysts originally expected, in part because of competition among private plans and the growing use of less expensive generic drugs.

....Though celebrated by the Obama administration, the widely acknowledged success of the Part D program is also fueling calls from conservatives to expand privatization of the Medicare program. Many House Republicans pointed to the drug program in pushing their plan to replace Medicare with a system of vouchers that seniors would use to purchase private health coverage.

These two paragraphs encapsulate perhaps my biggest frustration with public policy these days. On the one hand, I feel like I should acknowledge that I was wrong about the architecture of Part D. I believed that routing the benefit through hundreds of private insurers would prove both confusing and costly. But in the end, the confusion proved manageable once the kinks were worked out of the initial rollout, and competition among insurers has kept the price of the program significantly lower than expected. (Competition isn't the only reason it's come in under budget, but it's clearly a factor.)

So I'd like to take that as a public policy lesson, something we can all learn from. But where's the similar kind of acknowledgement on the other side? Nowhere. We already know what an architecture like Part D does for Medicare as a whole: it's basically Medicare Advantage, which has been a huge boondoggle. After more than a decade, the federal government still has to heavily subsidize Medicare Advantage providers, and the evidence is overwhelming that it fails to provide benefits anywhere close to its additional costs. It just doesn't work.

So that's a public policy lesson too. But there are no takers on the conservative side of the aisle. They simply ignore it, and instead insist on using the success of Part D to continue pressing for their ideological hobbyhorses.

This is pretty much the reason I'm no longer a neoliberal, but a recovering neoliberal. The neos believed that liberals should devote a lot of energy to getting public policy right, even if it meant gutting a few sacred cows along the way. The idea was that the public would never support an activist government unless they were convinced that it was being run as leanly and efficiently as possible. The problem is that this only works if the other side plays ball. After all, what's the point of agreeing to abolish a poorly working program if conservatives refuse to meet halfway and try to build a better program in its place? For most liberals, even a poorly working program is better than no program at all.

Politically, then, technocratic neoliberalism just doesn't work given the true-believer obduracy of the contemporary Republican Party. So we're left with trench warfare instead and no one's happy. Conservatives are unhappy because liberals keep defending programs that have poor track records, while those of us who suffer from the neoliberal temperament are unhappy because we're too busy fending off knife attacks to have a real chance of reforming the delivery of government services. Welcome to the modern world.

Good Obama, Bad Obama

A couple of days ago I said that Barack Obama had done more for the liberal agenda in two years than George Bush did for conservatives in eight. Today, Bruce Bartlett says that in practice Obama has "governed as a moderate conservative." So who's right?

Well, we both are. Let's review the Obama record:

He passed a big stimulus bill.....but was too timid to make it as big as it needed to be.

He continued the pullout from Iraq.....but sent 50,000 more troops to Afghanistan, amped up the drone attacks in Pakistan, and committed the United States to yet another foreign war in Libya.

He ended torture.....but kept up the NSA surveillance program and military tribunals for Guantanamo detainees.

He passed a historic healthcare law.....but based it on conservative principles and failed to fight for a public option.

He ended DADT.....but continues to merely "evolve" on the subject of gay marriage.

He pressed hard for financial reform.....but proposed legislation that was too weak to make a serious difference

He called out bankers as fat cats.....but caved to banking interests on foreclosure cramdown.

He beefed up the NLRB.....but declined to fight hard for EFCA.

He got agreement on a second stimulus in 2010.....but agreed to construct it nearly entirely of tax cuts.

He supported cap-and-trade legislation.....but handled it so lamely that even Republican supporters finally turned on him.

I could go on like this forever, and I'm sure my readers can add a thousand bullet items like this in comments. The plain fact is that Obama has presided over a historic amount of liberal reform, but it's also a plain fact that he's routinely acceded to conservative dogma and conservative demands — sometimes as part of a compromise to get half a loaf, sometimes because he genuinely seems to sympathize with those demands.

It's just not a simple record to characterize, and there's always going to be plenty of ammunition for critics and supporters on both sides. You just have to decide which half of the list above is most important to you and then open fire.

A few months ago I wrote a piece for the magazine arguing that the decline in unionization over the past three decades has been a key factor in the decline of the American left over the same period. But it's a hard case to prove because there are so many moving parts to it. So I was intrigued earlier this week when my colleague Josh Harkinson linked to a new study that attempts to quantify the effects of unionization on income inequality using a rigorous regression analysis of census data.

The study comes from Bruce Western and Jake Rosenfeld and was published this month in the American Sociological Review. The authors use a model that accounts for both individual membership in unions as well as overall unionization rates in specific industries and regions. It also controls for education, age, race, ethnicity, and gender, which allows them to estimate the effect of unionization both between groups (e.g., the evolution of income inequality between high school dropouts and high school grads) and within groups (e.g., the evolution of income inequality within the entire subset of high school grads).

Once their model was in place, Western and Rosenfeld could manipulate their variables to estimate what income inequality would look like if union density had remained at its 1973 level. So what did they find? Answer: Among men, if you account only for the effect of individual membership in unions, it would be about a fifth lower, which agrees pretty well with previous estimates. But if you also account for the effect of unions on surrounding nonunion employers (who often raised wages to compete with union employers and to avert the threat of unionization in their own workplace), the effect is larger: Unionization at 1973 levels would decrease income inequality by a full third. You can see this in the chart below. For intragroup differences (which account for nearly the entire effect of unionization) the top line shows the actual rise of income inequality since 1973, while the red line is a prediction of what it would look like if union density were still at 1973 levels:

The effect of unionization on women is less dramatic because women were never unionized at the same rate as men. For them, increasing returns to education are a bigger factor in rising income inequality than deunionization. For men, however, deunionization has had a huge impact: "The decline of the US labor movement has added as much to men's wage inequality as has the relative increase in pay for college graduates," the authors say.

Western and Rosenfeld's explanation for this is similar to Jacob Hacker and Paul Pierson's in Winner-Take-All Politics, last year's best book on modern political economy. Roughly speaking, there's a direct economic effect of unionization on wages, but there's also an effect of unions on the political system that indirectly affects wages. Western and Rosenfeld put it like this:

[Our] analysis suggests that unions helped shape the allocation of wages not just for their members, but across the labor market. The decline of US labor and the associated increase in wage inequality signaled the deterioration of the labor market as a political institution.…The de-politicization of the US labor market appears self-reinforcing: as organized labor’s political power dissipates, economic interests in the labor market are dispersed and policymakers have fewer incentives to strengthen unions or otherwise equalize economic rewards.

…[Prior to 1973,] unions offered an alternative to an unbridled market logic, and this institutional alternative employed over a third of all male private sector workers. The social experience of organized labor bled into nonunion sectors, contributing to greater equality overall. As unions declined, not only did the logic of the market encroach on what had been the union sector, but the logic of the market deepened in the nonunion sector, too, contributing to the rise in wage inequality.

In other words, deunionization has allowed income inequality to rise partly because unions are negotiating wages for fewer people than they used to, and partly because unions no longer have the power to force the political system to pay attention to the needs of the middle class. But if income inequality has to be reduced in order for middle class wages to grow—and it does—and if robust middle class wages are a key driver of the liberal project—and they are—then we're all in big trouble. Mass unionization is gone, and it's not coming back. This means we still need something to take its place, and we still don't have it. Until we do, the progressive movement will continue to tread water.

Just to make sure that everyone is still clear about this, here's the current trajectory of politics and the American economy stripped down to its bare essentials:

2001-2008: Republicans run economy into ditch.

2008: Obama elected.

2009-2011: Republicans respond by doing everything possible to prevent him from fixing things.

2012: Republicans use lousy economy as campaign cudgel against Obama.

2012: Republican candidate wins presidency (maybe).

Sure, sure, Obama deserves some blame for not being aggressive enough etc. etc. I get it. But that's a nit within the big picture. The basic story is the one above. It's still kind of hard to believe.

Our hardworking members of Congress have finally agreed to keep the FAA running:

Under a deal Reid made with House Speaker John Boehner (R-Ohio), the Senate will pass the House bill that includes cuts to rural flight service to airports in Nevada, West Virginia and Montana. But Transportation Secretary Ray LaHood will use his authority to waive the airports from the cuts, ending a 13-day impasse.

....The House and Senate passed a 20th short-term extension of FAA funding in May when the chambers both passed versions of the longer-term bills that were drastically different. The House version included provisions that would undo changes to labor rules that were adopted by the National Mediation Board to make it easier for railroad and airline workers to unionize.

So this is now the 21st short-term funding bill, and it will pass only because its actual provisions are meaningless. Yay Congress. A real bill remains held up indefinitely because Republicans are more interested in union busting than in — well, than in almost anything.

There is nothing — absolutely nothing — that Republicans feel more strongly about than union busting. That includes taxes, abortion, welfare spending, overseas wars, gun rights, tort reform, oil drilling in Alaska, and every other alleged conservative hot button. In the world of actual action — as opposed to the world of rhetorical fireworks — the only thing that even comes close is keeping taxes on the rich low.

This should tell you something about the real-world power of organized labor in the broader political economy. It's something conservatives have understood well for a long time.